An emergency fund is the first step to wealth. It is difficult and can be impossible to achieve any measure of wealth without the financial and mental ability to shrug off unplanned expenses and minor emergencies.
An emergency fund is a lump of money set aside for unplanned expenses. If you were to have an unplanned expense or minor emergency you would not need to borrow or sell something to be able to pay for it. In a 2013 study by the US Fed 47% of people said that they would have to borrow or sell something to cover an unplanned expense of $400. Building even a small emergency fund can massively lower your stress by removing this instability from your life.
The likelihood of certain risks and the cost that come with them are quite personal, but it is best to think about what are the most likely unplanned expenses to occur for you and then to put a cost on them.
Example of how someone would set their emergency fund:
Broken washing machine – replacement €320
Emergency car repair - €500
Lose your job – 2 months expenses while getting a new job €2,600
In this case, someone with a high risk tolerance might say ‘I believe I can get a job in 2 months so I need an emergency fund of €2,600’, whereas someone with a low risk tolerance might still want 6 months expenses in their emergency fund to feel comfortable.
When trying to figure out what emergency fund you need it can be helpful to think about the most likely unplanned issues you could have. If you have a job that is not fully stable it might be job loss or gap. If you have a car, it might breakdown. If you have children, they might get sick and need doctor visits and medicine. If you own a home, appliances can break. If you are self-employed or work on commission, you might have a few slow months and lower take home pay.
By writing down a list of the main risks you have and the financial impact they would have, you get a picture of what level of funds you need to stave of financial insecurity.
A safe rule of thumb is to have 6 months expenses in an emergency fund.
When you are starting to get your finances in order the idea of 6 months expenses in savings can be intimidating. If you find this the case, start simple and work your way up. Set targets and try to hit them until you get there.
A great point about planning to get 6 months savings in an emergency fund is that is underlines the importance of expenses. The more you can lower your expenses, the less you need in your emergency fund.
An emergency fund also acts as FU (Forget You, or cruder variants) money. Having this FU money allows you to not compromise your values in a work environment. If you are being asked to do something unethical or against your interests or beliefs, you can refuse knowing you have money in the bank.
An emergency fund gives you the basis for developing wealth as you can make investments and long-term choices without worrying about smaller unplanned expenses that can ruin the well laid plans of others.
If you don’t already have an emergency fund, work out what are your most likely unplanned expenses and figure out what you need to comfortably get through them.
If you already have and emergency fund in place, make sure to review it every 6 months to see if it still matches your current risk profile.
When it comes to your finances there is a lot to consider. Balancing the different aspects of your money can be complicated and knowing when to make the next move is often tricky. One of the best ways of dealing with the complexity involved with your personal finances is to perform a financial health check every now and then. At least once a year you need to review your full financial situation and consider how you are doing across every aspect of your finances.
If you don’t know where to start, try answering the below:
Once you have performed your financial health check, you need to consider how everything looks in relation to the bigger picture. After you do this, you may have to change how you think about various aspects of your money.
When you are starting off, having €1,000 emergency fund is great. When you have a mortgage, kids, and a sick elderly parent it is probably not.
When you have built up a large level of assets, using a credit card might be a better emergency fund than money in the bank. Having built up €30,000 credit you can use if needed can be more efficient than sitting on €30,000 in a bank account earning 0.1% interest.
When you are saving for a house deposit, not having a pension might be fine. Not having a pension from age 40 without having significant assets is not.
When you have no assets not having a will is fine, but is foolish when you do.
If you have kids, you probably need life assurance. This is more important when you are younger. Less is needed later. The good thing is that it is cheaper when you are younger.
The main point of doing this exercise is to consider each aspect of your finances in relation to your overall financial health, how it matches your risk appetite and whether it helps you meet your goals.
Sometimes, or possibly every time you do this exercise you may need to level up your thinking. If you are actively improving your finances you will need to change different aspects to keep them in line with your current life stage.
Managing your money is all about trade-offs. If your main goal right now is to save up the cash for a house deposit, it can be okay to put other things on the back burner like pensions, investing and you might spend less on some areas to increase the rate you can save at. However, if you don’t have a large goal at this moment and you have a high savings rate, you need to consider how pensions and investing will help your current and future situation.
It’s easy to get mental blocks when you don’t stop to assess the overall all picture. The person you are when you leave school is different to the person you are 3 years into your first job, and is different to the person you are 10 years into the workforce with a house 2 children. By doing a full assessment and considering the bigger picture you keep a grip of how you are set for your current position, not where you were in the past.
You need to be thinking at the level you are at, and at the level you are going to.
Having a low-income sucks. In your early years of work, you can put your head down and work your tail off but it often feels like wasted effort. When you start working, your pay is low and without taking steps, it may never move far from your starting place. The big problem here is that employers don’t want you talking about pay, often hiding behind vague rules and arbitrary timelines.
Income and spending are the 2 areas of your finances you can have most effect on. Income is not solely dependent on you which makes things more complicated, but it is the area that can have most impact on your personal finances.
When looking to get an increase in your income there is a few things you need to do.
Research the Field
Know what the standard salary is for what you do. Find out what people around you are being paid. Compare your work to theirs. If you are doing comparable or better work, you have the basis for asking for an increase. If you’re not, you need to improve yourself first.
Know the state of your employer. If your company is on the rocks, it can be futile pushing for a pay rise. Asking for a raise at an inappropriate time like when the company is in financial difficulty can also come across poorly. Know where your employer stands. You might have to look external from the start.
Know your industry. If 80% of your industry is minimum wage, unless you can break into the non-minimum wage part, it might be time to move on. There are also some industries with set periods for increases, such as accountancy programmes and apprenticeships where the training wages start low but ramp up as you become more qualified. If you don’t know the game you’re playing, you’ll never win.
If you are in a performance based area this part is easy as sales or quality is your measure. If not, find another way to get high performing and get it noticed.
Get to Work
Know the measures of a high performing employee and start taking on hard jobs and management tasks. Volunteer for tasks that are very important and nobody likes doing.
Volunteer for tough new projects and wear a smile while you do it. Unless your management is terrible, it will be noticed.
Meet With Your Manager
State your intention and expectations. Your managers are not mind readers. If you want a raise, let them know. Ask for the necessary information like what is the timeline for a raise, what is expected of you, and if possible, get a commitment that if you achieve the set expectations you will get the increase agreed.
You may need to improve your output or quality of work.
You might have hit a salary ceiling at your level and need a promotion before you can be given an increase. Without having this discussion with your manager and clearly stating what you want, and that you are willing to do what needs to be done to get it, you add unnecessary delays.
Some people will look for a raise because their rent increased or they feel like they deserve it. The disconnect is that your company doesn’t care about your rent or feelings. You need to focus on the value you provide and get set expectations and goals to achieve.
Be Mentally Prepared to Walk Away
I see so many people resentful with how they are treated about something in work, yet they stay. It’s like they’re stuck in the situation. Times have changed, you don’t have one job for life anymore, if it sucks, move.
If you met the targets you were given and the deadline comes and your work does not give you the increase they committed to, leave. Don’t get hung up on it. It’s probably not personal. There may be outside factors that mean they can’t pay more or are unwilling to. The reason doesn’t really matter, the result does. If you did your part and they follow up with their commitment, take your experience and leave.
You might be at the wrong time of the salary/promotion cycle. The company financials might be in a different state than before. If your timing doesn’t sync up, you might have to wait it out until this improves, or leave.
Going to a new company can give you a fresh start. Starting a new job is the best time to adjust your income. Most internal increases will be small and typically be referenced to your base salary. This is not ideal for you. External moves can give you the opportunity to get a salary not referenced to your current level.
Plan an Exit
What often happens when people are mentally prepared to leave is they are not physically ready. You want to have other job offers at the time, or just after your pay rise should have happened. If they don’t deliver, you should have done some interviews and have a job lined up already, preferably on the pay rise (or more) you were looking for anyway.
This increases your negotiating power. If you hit your targets and get your pay increase, great. However, if your employer doesn’t deliver or is on a different timeline, you have the option to move. A mistake often made is the threat to leave without having the ability to go. This is stupid and damaging. Don’t bring it up unless you’re ready to leave.
Getting an increase in your income if difficult. It takes hard work, a plan of attack and a bit of luck. As you can’t change the luck part you need to focus on effort and having a plan to succeed. As you progress in your career it will probably be harder to get a raise over time as you will hopefully be on more money and possibly at a higher level. In the early years of work, your income is lower and it can be possible to double your income in 2 years.
If you found this helpful, you might like having our “2 years to 2X Your Income” talk. The goal of this talk is to give you the tools to target specific ways to double your income in 2 years. Although doubling may not be possible for everyone, it is achievable for many, and those who strive and don’t quite reach it should still see a marked improvement.
Why employers should want this; Get more motivated employees looking to add more value to you and your bottom line. After they take some of this onboard, you’ll want to pay them more.
Why employees should want this: Get a solid plan to increase your income within the next 2 years.
Financial literacy leads to reduced stress, better decision making and the ability to plan to meet your personal goals.
Money Boot Camp Ltd.
Call: 00353 (0)871225761